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Business

Pound's Slide Pulls Britain Closer to Euro

As planeloads of European tourists roam London looking for cheap Christmas deals, the Labour government of Gordon Brown is keeping a stiff upper lip over the British pound's relentless slide towards parity with the euro.

A British five pound note

The British pound has lost a quarter of its value against the euro since summer

"We have never had a policy of targeting the pound," Yvette Cooper, a cabinet minister and close adviser of Brown told journalists curtly.

She recalled that attempts by previous British governments to meddle with exchange rates had been "unsuccessful," in what was a clear reference to the sterling's ejection from the European Exchange Rate Mechanism in 1992.

Now, as then, currency speculators are stoking the fire by seeking to make hefty gains from bets they place against the pound.

The sterling, which this week hit a record-low exchange rate of 1.05 against the euro, has lost a quarter of its value against both the euro and the US dollar since the summer.

Analysts predict that parity could be reached against the euro zone currency early in the new year.

While tourists, exporters and hoteliers rejoice at the trend, British holidaymakers are wincing at their currency's near-balance with the euro, which Britain refused to adopt in 1999.

Worst yet to come for pound

A protester waves anti-euro signs in London near the Bank of England in 1999

The debate over Britain adopting the euro is still raging

While the government maintains that the sterling's downward trend will be halted as European economies weaken further, analysts believe that there is worse to come for the stricken currency.

"This is likely to get worse as more investors lose confidence in the pound amid fears about the UK economy," said Mark O'Sullivan, a dealing director at foreign exchange specialists Currencies Direct.

Martin Slaney, head of derivatives at GFT Global Markets, a provider of derivatives trading services, agreed: "The euro is becoming the darling of the currency markets and there's no confidence in the pound. I would not be surprised if it hit parity with the euro and even falls below that."

The government has so far reacted calmly to signs that there could be a full-blown run on the pound, maintaining its belief that the downward trend can not be sustained.

Officials also point at evidence that the pound had, for a long time, been "overvalued."

To join, or not to join

The path to the euro zone

Downing Street maintains it has no plans to move the UK closer to euro adoption

However, the British currency's decline has, inevitably, reignited the debate about whether or not Britain should adopt the euro.

Speculation was fuelled by EU chief Jose Manuel Barroso who said recently that Britain was now "closer to the euro than ever before."

"I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off'," Barroso said in an interview with French radio.

His remarks provoked an angry response from Downing Street. "Our position on the euro is the same. We have no plans to join the euro," a statement said.

Officials have revealed that Brown, who is a long-standing opponent of introducing the euro in Britain, had made it clear to ministers that he would "not tolerate" a debate on the euro at present.

"Officially, the euro debate is off the agenda, but unofficially, it's in the anteroom," said leading British economist Will Hutton.

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